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Market Entry Strategies - Deciding How to Enter the Markets

MBA Outreach CENTRUM - Intake 7

Barbara Knup

3 November 2014

Learning objectives (Chapter 9)

– Identify and classify different market entry modes

– Explore different approaches to the choice of entry mode

– Identify the factors to consider when choosing a market entry strategy

Entry mode is an institutional arrangement necessary for the entry of a company’s products into a new foreign market.

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Types of entry modes

Export – 100% externalizing,

low risk, high flexibility, low control

Intermediate – shared control and risk,

split ownership

Hierarchical – 100% internalizing,

high risk, low flexibility, high control

Strategy rule is the rule for choosing a mode of entry based upon selecting the mode that maximizes the profit contribution over the strategic planning period subject to (a) the availability of company resources, (b) risk and (c) non-profit objectives.

Factors affecting foreign market entry mode decision

Internal factors

Desired mode

characteristics

Transaction-

specific factors

External factors

Entry mode

decision

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Internal factors affecting market entry mode decision

Firm

size

International

experience

Product

complexity

Product

differentiation

advantage

Entry mode

decision

Product

Desired mode characteristics affecting market entry mode decision

Flexibility

Control

Risk

averse

Entry mode

decision

Transaction-specific factors affecting market entry mode decision

Tacit nature of

know-how

Opportunistic

behaviorTransaction

costs

Entry mode

decision

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External factors affecting market entry mode decision

Socio-cultural

distance

Country risk/

demand

uncertainty

Market size/

growth

Direct/

indirect

trade barriers

Entry mode

decision

Intensity of

competition

Number of

export

intermediaries

All factors affecting decision

Entry modes in the Chinese market: A case study

– What factors do companies consider when determining the best form of operation to use when entering the Chinese market?

– What have been the challenges and opportunities for foreign companies in establishing collaborative arrangements?

– How have Chinese government policies and attitudes towards foreign businesses evolved? How have the changes affected foreign companies’ forms of operations?

Requires web access

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Learning objectives (Chapter 10)

– Distinguish between indirect, direct, and cooperative export modes

– Describe the two main entry modes of direct exporting

– Discuss the advantages and disadvantages of the main export modes

– Discuss how manufacturers can influence intermediaries to be effective marketing partners

Major Types of Exporting

Indirect export

Direct export

Cooperative export

(export marketing groups)

Indirect export modes

The manufacturer uses independent export organizations located in its own country (or a third country).

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Direct export modes

The manufacturer sells directly to an importer, agent or distributor located in the foreign market.

Indirect export modes

– Sale is like a domestic sale

– Most appropriate for firms with limited international expansion objectives

– Appropriate for firms using international sales as a means of disposing of surplus production

Indirect entry modes

Export buying agent

Broker

Export management company

Trading company

Piggyback

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Direct entry modes

Export via distributors

Export via agents

Distributor is an independent company that stocks the manufacturer’s product, but has substantial freedom to choose its own customers and price.

Agent is an independent company that sells on to customers on behalf of the manufacturer, does not stock the product, and earns profits from commission paid by the manufacturers.

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Functions of export marketing groups

– Exporting in the name of the association

– Consolidating freight, negotiating rates, and chartering ships

– Performing market research

– Appointing selling agents abroad

– Obtaining credit information and collecting debts

– Setting prices for export

– Allowing uniform contracts and terms of sale

– Allowing cooperative bids and sales negotiation

Learning objectives (Chapter 11)

– Describe and understand the main intermediate entry modes

– Discuss the advantages and disadvantages of the main intermediate entry modes

– Explain the different stages in joint-venture formation

– Explore the reasons for the ‘divorce’ of the two parents in a joint-venture constellation

– Explore different ways of managing a joint venture/strategic alliance

Contract manufacturing is the term used to refer to manufacturing which is outsourced to an external partner, one that specializes in production and production technology.

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Factors encouraging foreign market production

– Desirability of being close to foreign customers

– Foreign production costs are low

– Transportation costs may render heavy products non-competitive

– Tariffs can prevent entry of an exporter’s products

– Government preference for national suppliers

Benetton’s use of contract manufacturing

Benetton relies upon a contractual network of small overseas manufacturers

Licensing refers to the exchange of rights, such as manufacturing rights, to another in exchange for payment.

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Rights that may be offered in a licensing agreement

– Patent covering a product or process

– Manufacturing know-how not subject to a patent

– Technical advice and assistance

– Marketing advice and assistance

– Use of a trademark/trade name

Motives for licensing out

– Licensor firm will remain technologically superior in its product development

– Licensor is too small to have financial, managerial or marketing expertise for overseas investment

– Product is at end of product life cycle in advanced countries but stretching product life cycle is possible in less developed countries

– Opportunity for profit on key components

– Government regulations may restrict foreign direct investment or, if political risks are high, licensing may be only realistic entry mode

– Constraints may be imposed on imports

Life cycle benefits of licensing

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Franchising refers to the exchange of rights between a franchisor and franchisee, such as the right to use a total business concept including use of trade marks, against some agreed royalty.

Types of Franchising

Product and

trade name

franchising

Business

format

‘package’

franchising

Business format ‘packages’

Trade marks/ trade names/ designs

Patents and copyrights

Business know-how/ trade secrets

Geographic exclusivity

Store design

Market research

Location selection

Source: http://www.kabooki.com/

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McDonald’s is among the best known global franchise businesses

Source: http://www.mcdonalds.com/

Interdependence between franchisor-franchisee

Franchisor benefits

– Fast growth

– Capital infusion

– Income stream

– Community goodwill

Franchisee benefits

– Trademark strength

– Technical advice

– Support services

– Marketing resources

– Advertising

Joint venture refers to an equity partnership between two or more partners.

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Reasons for using joint ventures

– Complementary technology or management skills can lead to new opportunities

– Firms with partners in host countries can increase speed of market entry

– Less developed countries may restrict foreign ownership

– Costs of global operations in R&D and production can be shared

Joint ventures

Parent

firm

A

Parent

firm

B

Joint venture C

Strategic alliances

Parent

firm

A

Parent

firm

B

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Types of value chain partnerships

– Upstream-based collaboration

– Downstream-based collaboration

– Upstream/downstream-based collaboration

Collaboration possibilities in the value chain

Research

and developmentProduction Marketing

Sales

and services

Upstream Downstream

Research

and developmentProduction Marketing

Sales

and services

Upstream Downstream

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Source: Source: Adapted from Lorange and Roos, 1995, p. 16.

Principle objectives for forming a joint venture

Entering

new markets

Reducing

manufacturing

costs

Developing

and

diffusing

technology

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Factors to consider during the cost/benefit analysis

– Financial commitment

– Synergy

– Management commitment

– Risk reduction

– Control

– Long-run market penetration

Sources of potential conflict

– Diverging goals

– Double management

– Repatriation of profits

– Mixing cultures

– Shared equity

– Developing trust

– Providing an exit strategy

Marriott: A case study

– What could be the main motives for Marriott in using franchising, compared to other entry modes and operation forms?

– Identify several major categories of segmentation used by Marriott. For each, relate specific examples of hotel services tailored to various target markets.

Requires web access